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Airline industry pulls out of a nosedive

Today's Financial News - Posted April 21, 2009

The nation’s airline industry is handing investors some surprising gains. Don’t look to the big carriers for your profits. The biggest gains will come from regional carriers.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): In the teeth of nasty recession, few investors would look to the airline industry as a source of market-beating profits. After all, it is a sector ravaged by high fuel prices, speculative hedges, multiple high-cost unions and now a major decline in service demand.

Even with all of these factors working against the nation’s airlines, the index that measures the collective shares of the industry’s major players, (AMEX:XAL), has solidly beaten the benchmark S&P 500 over the past few weeks.

In the last month, the airlines have outpaced the market by over 30%. (On a long-term basis, however, the chart is not nearly as pretty for airline investors).

This recent trend is a sign that the industry’s consolidation and cost-cutting measures are starting to work. Even more importantly, it is an indication investors underestimated the value of the nation’s skies.

For Delta (NYSE:DAL) investors, today’s news that the company lost just $794 million over the last three months has led to a strong double-digit surge in share price. This time last year, the company was trying to explain a whopping $6.39 billion loss.

It is a similar situation over at UAL Corp (NYSE:UAUA), the company that own United Airlines. This time last year, it was sitting on a quarterly loss of $549 million. Today, its investors can breath a little easier knowing their company came just $382 million short of a profit.

Time to buy?

All of the positive action in the airline industry over the last few weeks has plenty of investors wondering if now is the time to make a move.

My answer is no way, unless you are extremely selective and can quickly enter and exit a trade.

Airlines are riddled with business model flaws that work to gnaw away their profit potential. The only reasons shares are up on a wholesale basis today is the industry proved slightly healthier than investors thought. These companies are still losing massive amounts of money, with no end in sight.

Do not fall for the argument that has falling fuel prices offsetting a drop in seat revenues. Ill-timed hedges will put the crimps on those gains.

Even so, there are ways to profit from the industry. To do it, look to the small, regional carriers that have a lock on a strong, hopefully expanding market.

The first one that comes to mind is Alaska Air Group (NYSE:ALK). The company not only carries the majority of passengers in and out of the nation’s 49th state, it also carries much of the airborne freight, including the mail.

Tangent industries hold profits

Another company worth looking at is AAR Corp. (NYSE:AIR). It works as a maintenance contractor and supply-chain manager for the nation’s air fleet. As airlines work to cut costs and eventually add more seats to their existing routes, the company will see increased revenues. This is a good opportunity for you long-term, buy-and-hold investors.

The airline industry is unpredictable and highly cyclical making it a tough game for many investors. But if you make the right moves, and are prepared to make them quickly, there are plenty of profit opportunities out there.

Today’s gains should be all the proof you need.


Next Article: How the market can make fools of us all

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Posted by Andrew Snyder · Filed Under Featuring..., US Stocks and Markets 

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